Some Luxembourg employers choose to set up a supplementary pension scheme (the 'second pillar' of pension insurance) for all of their employees or for only one category of their employees. By doing so, employers can grant their employees benefits intended to supplement those of the legal social security schemes for retirement, death, disability or survival.
Employers can choose between financing the supplementary pension scheme internally—through provisions on the liability side of the employer's balance sheet—or externally—by paying premiums to an insurance company or a pension fund—as part of a defined benefit plan or a defined contribution plan. Employees can make personal contribution payments to the supplementary pension scheme put in place by their employer, if permitted under the terms of the scheme.
Who is concerned
This applies to any person:
- be they a resident or non-resident, who is or has been an employee in Luxembourg;
- who receives benefits paid under a supplementary pension scheme implemented by their former Luxembourg employer.
How to proceed
Flat-rate tax withholding borne by employer
From a tax point of view, all provisions, insurance premiums, and contributions for the purpose of financing a supplementary pension scheme are taxable as benefits-in-kind from paid employment.
These benefits are taxed at a flat rate of 20 %, withheld at source and borne by the employer.
This taxation is final for employees. As such, employees are not required to report these contributions or the tax withholding borne by the employer in their income tax return.
Deduction ceiling for personal contributions
Employees' personal contributions to an employer-sponsored supplementary pension scheme are tax deductible as special expenses up to EUR 1200 per year.
Employees' personal contributions may be withheld from their net salary and deducted in the maximum amount EUR 1,200 as part of the taxes withheld from salaries by the employer.
These contributions are to be reported in the income tax return.
Resident taxpayers who receive benefits paid under an employer-sponsored supplementary pension scheme, have no tax obligations to discharge since these benefits are not taxable.
Indeed, upon leaving the scheme, supplementary pension benefits in the form of a life annuity or lump-sum capital payment, are fully exempt from income tax. This exemption is explained by the fact that all contributions to the supplementary pension scheme were taxed a flat-rate tax of 20 % when paid.
Non-resident taxpayers who receive benefits paid by a supplementary pension plan set up by a Luxembourg employer are not taxed in Luxembourg for such benefits. However, such benefits are, in principle, taxable in the taxpayer's country of residence.
Nonetheless, the amendment to the double taxation agreement between Luxembourg and Belgium provides that benefits paid under a Luxembourg supplementary pension scheme are not taxable in Belgium for Belgian-resident taxpayers insofar that the contributions paid by the employer had already been taxed in Luxembourg.
Maintenance or transfer of acquired rights
The treatment of acquired rights from a supplementary pension scheme in case of resignation/dismissal can be found in our dedicated explanatory information page.